Self-Employed Fall into Poverty Trap Without Exit

By Yoon Ja-young

Staff Reporter

Imagine a man in his late forties with family to support suddenly fired from his work. What can he do for a living in Korea? In this inflexible labor market, finding another job in their field is very difficult for many ordinary, old, salaried workers. Opening a small cafeteria or a shop with retirement benefits is often an easy, but unfortunately only option.

Many Koreans are working as self-employed either voluntarily or involuntarily, but there are too many on the market. It has turned into a red ocean, and many are closing down their businesses, often falling into poverty. Labor economists advise the government to bolster safety nets for them and to foster a flexible labor market.

Too Many Self-Employed

Self-employed refers to non salaried workers, who input their capital and labor, deduct the costs, and get the rest as income, unlike others who get fixed salaries. These could include high-income professionals such as doctors or lawyers, but most of them run small shops, cafeterias, or stalls in the street.

In Korea, the proportion of these people in the job market is too high. According to statistics by the National Statistical Office (NSO) and International Labor Organization (ILO), the rate of the self-employed among those with jobs was 33.5 percent in Korea, the highest among Organization for Economic Cooperation and Development (OECD) member countries. The proportion was 17 percent in Italy, 15.4 percent in Canada, and below 10 percent in Denmark and the United States. When considering families who help the self-employed at shops, the rate rises to around 40 percent.

The competition is even fiercer among businesses that one can easily start without much capital or skill. According to the Bank of Korea, there are 12.2 restaurants and cafeterias for every 1,000 people in Korea, seven times higher than the 1.8 in the United States. The number of barbershops and hairdresser shops was 2.2 per every 1,000 citizens, eight times as many as in the United States.

Closing Down Businesses

Many are forced to close down their businesses due to low profitability amid strong competition. According to data by the Small and Medium Business Administration, an average of 756,000 small business owners closed down each year from 2003 to 2006, while those who started businesses averaged 882,000. It means the ratio of those who close down business to those who start businesses is approximately 85 percent.

The hardest hit are cafeterias and restaurants. Some 23,812 restaurants closed down in September while less than 5,000 opened as people refrained from eating out amid the economic slowdown. Other statistics from the Statistics Research Institute showed that among cafeterias that opened in 2001, only 28.7 percent survived until 2005. Korea Central Beauticians Association announced that the number of barbershops and hairdresser shops decreased by 1,500. According to Gogyoungjin Business Consulting Office, about half of its customers are requesting consultations on how to close down their businesses sustaining the least loss.

Their income is already low. According to the Korea Labor Institute, the self-employed made 13.7 million won on average in 2007, only around half of the average of salaried workers. When considering inflation, their annual income has decreased by 2.6 million won from a decade ago.

On top of the fierce competition, the self-employed have been hit hard by the recent financial crisis and economic slowdown as people cut their spending. Hence, many are depending on loans to keep their businesses afloat. According to the Bank of Korea, the self-employed in wholesale and retail or restaurant and lodging, had loans jump to 83.5 trillion won in the second quarter this year, up near 50 percent from 2005.

According to the Ministry of Strategy and Finance, the number of self-employed totaled 5.95 million as of the first half this year, down 73,000 from the previous year. Labor economists explain that those who started businesses by getting loans from credit cards are at where they cannot sustain them.

Why So Many Self-Employed?

According to labor economists, Korea's labor market has uniquely high ratio of self-employed compared with other developed countries due to rapid industrialization. ``While other OECD member countries went through industrialization and urbanization over a considerable period of time, the process was very rapid in Korea. The young, capable people could become salaried workers, but others from rural areas who were in their 40s and 50s couldn't get a salaried job in the city,'' explained Keum Jae-ho, a senior fellow at the Korea Labor Institute (KLI). They could make enough money running small shops during the 1970s and 80s when the economy grew over 10 percent annually, but not anymore.

``The services sector went through restructuring in the 1990s, becoming larger and more specialized. Consequently, the self-employed with small capital and without expertise lost out in the competition,'' Keum said. As mega outlet chains opened, for example, small vendors nearby had to close down.

Economists also cite the inflexible labor market. When expelled from the salaried worker market, it is very difficult to get a similar job. Hence they are forced to become self-employed even though they don't want to. ``Unlike other countries, Korea doesn't have a layoff system,'' explained Kim Yong-seong, a research fellow at the Korea Development Institute (KDI). ``The company is obliged to call the employee back first when things get better. In Korea, however, it's mostly firing,'' Kim said.

Keum pointed out that Korea's corporate culture has problems. ``Other countries pay according to one's capability, but Korean companies pay based on length of service. Senior staff who were paid 80 million won a year wouldn't want a job that pays only 30 million won, even though his capability is little different from that of a rookie.'' He said that Korean companies don't train employees to become experts in their fields.

He added that young people are joining the already saturated self-employed market due to fierce job competition. ``After failing in years of job searching, those in their early 30s have no other option but to start their own business,'' the economist said. Young people dreamed of building up venture business in the early 2000s, but now they think about opening cafeterias, coffee shops, or Internet shopping malls. One out of five in their 20s or 30s and with jobs are engaged in wholesale and retail or the restaurant lodging businesses.

Flexible Job Market

Rep. Lee Hak-jae of the governing Grand National Party criticized the government's policy encouraging people to start small businesses as a short-sighted one that only focuses on pulling down the unemployment rate. ``It only accelerates the fall into poverty. The government should create more decent jobs and allow them to become salaried workers through the job market,'' the lawmaker said.

Kim of the KDI said the government should encourage a retirement annuity system. ``People get a lump sum of money at retirement instead of an annuity under the Korean retirement system. People have to do something with the money and it is also burdensome for the businesses.'' He said the government should give more incentives to businesses that introduce retirement annuities.

He pointed out that the self-employed are excluded from the social safety net. Even progressive parties' labor policies usually focus on urban wage workers, not the millions of self-employed. They have no other option but to start another business, resorting to low-interest rate loans given by the government. ``Waged workers, for example, are obliged to get job training in exchange for unemployment benefits. The self-employed should also be included in this program. The government should help them build up specialties.''

Keum of KLI called for a social safety net. ``The most vulnerable are those aged over 60, people with little education, females, and those with few assets. If left as they are now, they will have to close down businesses or fall into poverty even if they continue to work. The government should help them prepare for retirement, or find new job.''

chizpizza@koreatimes.co.kr